Isas will be taxed for the first time in one of Rachel Reeves’s final acts as Chancellor.

Savers who hold cash in their stocks and shares Isas will soon be clobbered by a 22 per cent tax charge in a brutal betrayal of the tax-free Isa promise.

The Treasury announced last night it will introduce a new tax to punish savers for holding cash in these accounts from April 2027.

The attack on Isas, which are popular due to their tax-free perks, has sparked fury among the financial industry as experts have branded the fresh rules ‘draconian’.

Plus, the tax-free guarantee of these accounts has now been ‘undermined’, leading financial insiders have told This is Money and the Daily Mail.

They have warned the new charge levied on interest will damage Isas’ reputation as a tax-efficient way to save and make an already complicated system even more complex.

Ms Reeves plans to impose the new higher rate of savings tax on cash in investment accounts to prevent savers sidestepping her Budget raid on the cash Isa allowance. 

Rachel Reeves staged a raid on the cash Isa allowance in the Budget and now plans to levy tax on them for the first time so savers cannot sidestep it

Last November, Ms Reeves cracked down on the amount that can be saved in cash Isas, slashing the annual allowance from £20,000 to £12,000 for under-65s from April 2027. 

The amount that can be put in an investment Isa will remain at £20,000 in each tax year, in a bid to push more savers to invest in the stock market.

However, the Chancellor has now gone one step further. Savers who hold cash in a stocks and shares Isa will have to pay 22 per cent in tax on any interest they earn from April.

Shadow Chancellor Sir Mel Stride told the Daily Mail: ‘Rachel Reeves’ parting gift to Britain looks set to be a further tax raid on savers. Labour’s tax changes are a double whammy for savers – cutting Isa allowances while raising the tax rate on savings interest.

‘Now it looks like even investment Isas will not be safe. Labour are punishing people who have done exactly what governments have long encouraged them to do: work hard, save, and get ahead.’

Why investors often need to hold cash 

There are two main types of Isas – a cash Isa where savers can earn interest without paying any tax, unless with ordinary savings accounts and a stocks and shares Isa where investment returns are tax-free.

However, savers typically hold cash and ‘cash-like’ money funds in stocks and shares Isas. This can happen when money is added to the account but not yet invested in a stock or fund or if someone is holding off investing their money during periods of market volatility.

From April 6, 2027, savers under the age of 65 will only be able to put a maximum of £12,000 into a cash Isa and if they want to invest the remainder (£8,000), they can put it into stocks and shares.

The Chancellor’s swingeing 22 per cent tax charge is designed to stop savers flouting the new cash Isa cap coming into effect next April, amid fears that savers will place all of the remaining £8,000 allowance in cash inside an investment Isa. 

Under current rules, this money would earn a high level of interest free of tax.

Those holding cash in their accounts for genuine reasons, such as while they choose where to invest their funds, will also be clobbered by the tax raid.

Jason Hollands, a managing director at investment platform BestInvest, says: ‘This undermines the tax-free promise of Isas. It’s like using a sledgehammer to crack a walnut.’

Plus, there are concerns that appetite for investment risk may sour due to the charge.

Rachael Griffin, of wealth manager Quilter, says: ‘It risks making the product feel more complicated at precisely the point policymakers want cautious savers to take their first steps into investing.

‘In practice, applying a flat-rate charge to interest means investors will simply receive a reduced net return regardless of their personal tax position, effectively introducing a consistent haircut across cash holdings rather than targeting a specific behaviour.’

Simon Harrington, of the Personal Investment Management & Financial Advice Association, added: ‘We remain disappointed that the government has chosen to introduce such draconian anti-avoidance measures and, by extension, further complexity into the Isa regime, with little to no evidence that consumers will behave as these measures assume.’ 

There were initial fears that ‘cash-like’ money market funds could be swept into the tax sting, too. These funds typically invest in government bonds set to pay out in the next few months, so the income they offer is quite secure.

But HMRC has yet to clarify whether those with portfolios entirely made up of these money market funds will be penalised. 

Transfers from non-cash Isas into their cash equivalent will also be banned under the new regime, but the reverse will be allowed.